ECON 201 Exam 4 Review
Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. If the consumption function is C = $500 + 0.8Y, planned investment = $200, government purchase = $300, net exports = $100, and real GDP = $1,000, what is the amount of aggregate expenditures?
$1,100 Add all of it up and subtract consumption function
(GRAPH) An equation for the consumption function is:
C = 1 + 0.5Y
If Canada has a capital account deficit, it means that
Canadian residents purchase more foreign assets than foreigners purchase Canada's assets
Investments will generally lead to an increase in a nation's capacity to produce (T/F)
True
Net investment adds to the nation's capital stock (T/F)
True
New investment adds to the nation's capital stock (T/F)
True
The marginal propensity to consume is the change in consumption divided by the change in disposable personal income (T/F)
True
There is a negative relationship between the quantity of investment demanded and the interest rate (T/F)
True
In the long run, sustained inflation is due to
a continuous increase in the money growth rate
The international trade effect results in
a movement along the aggregate demand curve
The balance between spending flows into a country and spending flows out of that country is called a country's
balance of payments
The wealth effect is the tendency for
changes in the price level to change real wealth and consumption
A decrease in investment demand would most likely be caused by a
decrease in the expected demand for output
Changes in net exports caused by changes in the domestic price
do not shift the aggregate demand curve
In the long run, international trade
does not affect the natural level of employment or the real wage
A lower price level in the United States _____ U.S. exports and _____ U.S. imports
encourages, reduces
Net exports equal
exports - imports
In general, an increase in the income tax rate will make the aggregate expenditures curve
flatter and the multiplier smaller
(GRAPH) Consider point A where inflation is relatively high and unemployment is relatively low. In order to move down the curve toward point B, what fiscal policy measures should the policymakers undertake?
increase taxes and decrease government spending
An increase in net exports, all other things unchanged
increases aggregate demand
Frictional unemployment exists because
it takes time for people seeking jobs and employers seeking workers to find each other
An increase in the U.S. dollar exchange rate means foreigners must pay
more for dollars and more for U.S. exports
If gross private domestic investment exceeds depreciation then
net private domestic investment is positive
The Phillips phase of the inflation-unemployment cycle emerges because
of unanticipated increases in the price level produced by increases in aggregate demand
The recovery phase of the inflation-unemployment cycle emerges if
policymakers respond to a recessionary gap by increasing aggregate demand
A ceiling imposed by a country on the quantity of a good or service it will import is called a
quota
An increase in a country's exchange rate will
reduce its net exports
During an economic downturn, households respond to a decline in income by
reducing consumption
(GRAPH) Which of the following represents the stagflation phase?
the movement from B to C
The investment demand curve shows
the quantity of investment demanded at each interest rate, with all other determinants of investment unchanged
The lowest wage that a worker would accept, if offered a job is called
the reservation wage
In the graph that shows disposable income on the horizontal axis and consumption on the vertical axis, at every point on the 45-degree line,
the value of disposable income equals consumption
In the aggregate expenditures model, if aggregate expenditures equal $800 billion and real GDP equals $600 billion
unplanned inventory depletion equals $200 billion
In the aggregate expenditures model, if aggregate expenditures equal $800 billion and real GDP equals $600 billion,
unplanned inventory depletion equals $200 billion
Comparative advantage in production of a good occurs
when a country can produce that good at a lower opportunity cost than could other countries
Policies that deter investment such as an increase in the corporate profit tax rate
will reduce aggregate demand, and eventually shift the LRAS curve to the left
A reduction in the interest rate, while stimulating investment in the short run, has little or no effect on economic growth in the long run (T/F)
False
In the Phillips phase of inflation-unemployment cycle, real GDP rises and inflation falls (T/F)
False
Personal saving is real GDP not spent on consumption (T/F)
False
The Phillips phase of the inflation-unemployment cycle occurs when both inflation and unemployment increase (T/F)
False
A decision to produce more investment goods and fewer consumption goods - requires the sacrifice of current and future consumption - allows the production of more of both types of goods in the future - requires and increase in current savings
II and III only - allows the production of more of both types of goods in the future - requires and increase in current savings
A change in autonomous aggregate expenditures will shift aggregate demand by an amount equal to the change in autonomous aggregate expenditures times the multiplier (T/F)
True
Suppose the full-employment level of the real GDP is increasing at a rate of 4% per period. If policymakers are committed to keeping the long-run inflation rate at 3% per period, then what is the targeted money growth rate, assuming constant velocity?
7%
According the current income hypothesis:
A change in income regarded as temporary will not affect consumption much since it will have little effect on average lifetime income
(TABLE) If the market rate declines from 15% to 13%, what happens to the quantity of investment demanded?
It decreases by $1,000 because investment is now less profitable
A decrease in the money supply will shift the AD curve to the left (T/F)
True
Employment in the long run does not depend on the trade deficit (T/F)
True
The notion that there is a tradeoff between inflation and unemployment is expressed as
Phillips curve
Investment will generally lead to an increase in a nation's capacity to produce (T/F)
True
Consider the following two events: (i) an increase in the cost of new capital goods; and (ii) a decrease in corporate income tax rates. How will these events affect the demand for investment?
These events have an indeterminate effect on the demand for investment
The consumption function expresses the
relationship between consumption and disposable personal income
As the incomes in foreign nations rise, their imports from the United States will
rise
In the recovery phase of the inflation-unemployment cycle, a falling rate of inflation means that the price level is
rising by smaller and smaller percentages
A decrease in the level of economic activity will generally
shift the investment demand curve to the left
Aggregate expenditures are the
sum of planned levels of consumption, investment, government purchases, and net exports, at a given price level, as they relate to real GDP
The marginal propensity to save is given by
the change in saving divided by the change in disposable income
Which of the following will shift the investment demand curve to the left?
the government repeals investment tax credits
